A Reversal for Real Estate After Some Mild Gains

Recent sales volumes for both homes and commercial real estate were low, and many properties sold were in trouble before the sale.

FLOYD NORRIS

PRICES for both homes and commercial real estate are falling again. Meaningful improvement may have to wait until there are many fewer distressed properties for sale.

Indexes of the two markets showed this week that the latest declines had almost wiped out the mild gains the two markets had shown after prices appeared to have hit bottom.

The Standard & Poor’s/Case-Shiller index of home prices ended February 3.3 percent below where it was a year earlier, and just 0.5 percent above the low reached in May 2009. The Moody’s/REAL Commercial Property Price Index was reported to be down 4.9 percent over the last 12 months, but still 0.8 percent above its low, reached last August.

In both cases, sales volumes are far below what they were when the markets were booming, and a large proportion of the properties that are being sold were in trouble before the sale. The National Association of Realtors estimates that about 40 percent of existing homes that changed hands in March were either in foreclosure or were so-called short sales in which the house was sold for less than was owed on the existing mortgage.

The commercial property index, which is based on data collected by Real Capital Analytics, shows that 29 percent of transactions in February involved distressed properties — including those already in foreclosure or default, as well as those whose owners had filed for bankruptcy.

“Only when the share of distressed sales meaningfully drops off will we be able to enter the recovery phase,” said Tad Philipp, Moody’s director of commercial real estate research.

As can be seen from the accompanying charts, home prices nationally peaked in 2006 but did not begin to plunge until 2007.

At first, that was widely viewed as a result of problems in the subprime mortgage market. Commercial real estate prices rose until early 2008, but then declined rapidly. The latest values for the indexes show national home prices down 31 percent from peak levels, while the commercial real estate index shows a fall of 45 percent.

The charts show the trend of prices since December 2000. Home prices are about 27 percent higher than they were then, but commercial real estate is up just 6 percent. Meanwhile, in a tortoise-versus-hare tale, home rental rates are higher than they ever were even though they failed to boom when real estate prices soared.

Both indexes are based on repeat sales of the same property, and the relative lack of commercial property transactions — the index counted only 107 in February for more than $2.5 million each — means that the figures are far from exact. But they do show trends.

According to data from Moody’s, hotels and apartments are in the most distress, with about 16 percent of loans in each category classified as delinquent. About 10 percent of loans on industrial property are in trouble, while the figures for offices and retail properties are lower, at around 7 percent.

Over all, the proportion of commercial loans in distress climbed from under 1 percent at the end of 2008 to over 9 percent now. But it has been stable in recent months, providing some hope that the market is no longer deteriorating.

On a regional basis, the same markets tend to have problems in both commercial and residential real estate. The three states with the highest proportion of commercial loans in distress, according to Moody’s, are Nevada, Arizona and Michigan. In Nevada, more than 30 percent of loans are classified as being in trouble, nearly double Arizona’s 16 percent figure.

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